Should I Rent or Buy a House?

Should I rent a house or buy a house?   The answers vary for each individual, because it really depends upon your situation; lifestyle, job situation, family planning and finances.  You don’t usually jump into home ownership when you start your first job because you are just covering the basics for survival like food and shelter. You normally consider home ownership when you have a stable and steady job history, good credit and money saved.There are many things to consider when buying a home such as the down payment, closing costs, how long you plan to live there, how much you can afford to pay monthly and maintenance costs.  When considering the home expenses, keep in mind that you will need to save money for home repairs such as plumbing, appliances, hot water heater, air conditioner, furnace, roof, etc.  You will also have more expenses in the form of utilities, such as gas, electricity and water.

Home Ownership

Home ownership is the American dream, supposedly.  You build equity and eventually own something of great value.  Interest on mortgage is tax deductible and the mortgage is reported on your credit reports. You have more options of where you live, become more stable and have privacy, which you don’t have in an apartment.  Compared to renting, home ownership is a long term commitment in which you can’t easily move. Your expenses can be higher to cover the costs of mortgage payments, utilities and repairs AND the down payment required could be very significant.

Rent

Renting gives you the flexibility to be mobile because it’s a short term commitment, your monthly payments are lower, usually.  And, you have practically no repair costs.  Renting lets you save money for the mortgage down payment and build or rebuild credit. As a result of renting, you don’t own anything.  And, you have much less privacy and $0 in tax deductions.

Comparison

For example, compare a house priced at $120,000 with a 10% down payment or mortgage of $108,000 at 5% fixed interest for 30 years to an apartment rental of $700 a month.  The mortgage is $844 a month including principal, interest, taxes and mortgage insurance: the rent is $715 a month which includes apartment insurance.  If you subtract $200 a month for the interest deduction combined on state and federal taxes over first seven years of the mortgage, the monthly cost is $644 or savings of $71 a month.  This amount does not include repair fees or utilities for the home, which would exceed this amount.  The math would be different at a different interest rate and down payment.

Mortgage  is the first column and Apartment Rental is the second.

Principal and Interest                  $580                           $700

Taxes and Insurance                     $208                           $ 15

Mortgage Insurance                       $56                              $0

Monthly Total                                  $844                           $715

Less tax deduction                       $200                               $0

Monthly costs                                 $644                           $715

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Report, Getting Credit

This post was written by John Ulzheimer